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De Minimis Safe Harbor Provides Relief for Lowered Sec. 179 Limits

Millions of small businesses have taken advantage of Code Sec. 179 to deduct equipment and enhance their bottom line. Code Sec. 179 allows taxpayers to elect to expense the cost of “section 179 property” instead of depreciating it over its useful life. Section 179 property includes almost all types of business equipment that your company buys or finances and is limited to the company’s net income.

Starting in 2015, Sec. 179 limits have been lowered, and it’s important to be aware of them and other options available. The Section 179 deduction limit for tangible personal property has gone from $500,000 to $25,000, and the spending cap on purchases has also been reduced from $2,000,000 to $200,000 going forward. However, there is another option that can provide a way around the new limits.

Safe Harbor Election

The “de minimis safe harbor election” is an annual election that was introduced with the recently released IRS tangible property repair regulations. The election allows businesses to expense specified amounts paid to acquire or produce tangible property, provided the amounts do not exceed applicable thresholds. If conditions are met, costs that a business would otherwise have to capitalize and depreciate over its useful life can instead be deducted in the year of purchase.

This election can be very beneficial for companies because amounts expensed under the safe harbor won’t fall under the $25,000 Section 179 expense limit.

What Qualifies

The de minimis safe harbor election applies to amounts paid during the tax year to acquire or produce what the regulations call a “unit of property” (UOP), or to acquire a material or supply, if

(1) at the beginning of the tax year, the taxpayer has accounting procedures or a policy in place to expense amounts paid for property costing less than a specified dollar amount, or with an economic useful life of 12 months or less. These procedures must be written procedures for taxpayers with “applicable financial statements”, AFS, defined below.

(2) the taxpayer treats the amount paid for the property as an expense on its AFS, if it has one, or on its books and records if it does not, under its accounting procedures; and

(3) the amount paid for the UOP doesn’t exceed $5,000 per item if the taxpayer has an AFS, or $500 if the taxpayer doesn’t have one.

An AFS is a certified audited financial statement. There are also a few other items that qualify as an AFS, but a review and a compilation do not.

Details to Note

Taxpayers who meet the de minimis safe harbor requirements, including having written accounting procedures in place at the beginning of its tax year and treating qualifying amounts paid for property as expenses in accordance with those procedures, are not required to get IRS approval for a change in those procedures (such as to conform to or adjust the $5,000/$500 limits).

Although amounts expensed under the de minimis safe harbor election aren’t subject to capitalization under Code Sec. 263(a), they may have to be capitalized under Code Sec. 263A if the UNICAP rules apply to the taxpayer.

Business will need to monitor tax law changes to discover if Congress will adjust the Section 179 limits to a higher amount for tax year 2015.